Jigar M. Patel
International Tax Attorney
It’s never fun to lose money on an investment, but lawfully structuring and reporting a capital loss on your tax return can certainly be an effective consolation prize in several cases. Similarly, intelligent investors, who comprehend the rules of claiming capital losses within the four corners of income-tax law, can plan to reap useful tax savings in respect of their capital gains, with a few simple but smart strategies.
Claiming Loss in respect of Delisted Shares
Investors naturally get frustrated when they realise that some of their share scrips have been delisted on the stock exchange and for all practical purposes, the value of such investment has turned into scrap. It needs to be borne in mind that just because the value of some shares has become zero since they are delisted and cannot be traded on the exchange, an investor cannot claim any loss under his Income-tax Return (ITR).
Under the Income-tax Act, a capital loss cannot be computed unless there is an actual transfer. As long as the delisted shares do not move out of your account, you cannot claim a loss. Your dilemma would be how you can transfer your shares which are in demat but are not traded on the exchange.
Resolving the Challenge – Initiating Off-Market Transfer
This challenge can be effectively resolved by transferring the unlisted shares from your demat account through an off-market transaction for a very nominal price to any of your friends or relatives. In respect of an off-market transaction, since no Securities Transaction Tax (STT) is payable, the same would be governed by the provisions of Sections 2(42A) and 112 of the Income-tax Act for purposes of determining the period of holding of the shares, whether ‘short-term’ and ‘long-term’ and the manner of computation of taxable capital gains and choice of rate of tax on the same.
As per Section 2(42A), in respect of unlisted shares the holding period for treating the same as long term would be 24 months. Under Section 112, the taxpayer has an option to offer for tax LTCG from unlisted shares at the rate of 20% availing the benefit of indexation or at the rate of 10% without indexation. Set off of loss from the delisted shares, either as short term or long term, against corresponding capital gains earned by the taxpayer can be strategically planned so as to avail maximum tax benefit.
Claiming Loss for Shares post Liquidation of Company
Where the National Company Laws Tribunal (NCLT) has ordered liquidation of a company, shares of the company get extinguished. Extinguishment of rights in a capital asset is regarded as a ‘transfer’ within the meaning of Section 2(47) and accordingly the loss suffered by the investor can be claimed as a capital loss under his ITR in the year in which such liquidation takes place. Such capital loss can accordingly be claimed by way of set-off against eligible capital gains.
